Can a Stock-Trader-Turned-Convict Start a New Life?

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Roomy Khan was sentenced to a year in prison for insider trading.CreditHolly Andres for The New York Times

By Anita Raghavan

Feb. 27, 2015

One day in the middle of 2008, Sakhawat Khan, a Silicon Valley chip engineer, walked into a small house near the back of his two-acre property that his wife, Roomy, a stock trader, used as a home office. Roomy and Sakhawat met when they were electrical-engineering students at Columbia University. After graduating, Sakhawat started inventing, eventually gathering some 30 semiconductor patents to his name. Roomy, who was more outgoing in social situations and more restless in her appetite for risk, was drawn to Wall Street and joined Galleon Group, a New York hedge fund run by the charismatic, bullish trader Raj Rajaratnam. In 1999, she struck out on her own to trade technology stocks. She thrived. Riding the Internet boom, she said, she had amassed a paper fortune of $50 million.

“I am not kidding when I say I had money,” Roomy told me when I met her recently. “I had a lot of money.” In the late 1990s, the Khans moved out of their house in Sunnyvale, Calif., — Roomy called it a “khudd,” a Punjabi word for “hole” — and bought a 9,000-square-foot mansion in Atherton, the wealthiest town in Silicon Valley. They paid $10.5 million, all cash. The house had a pool, a tennis court and more than half a dozen marble fireplaces. They gave lavish parties for their friends and once, on a whim, spent $50,000 on wine.

When Sakhawat visited Roomy in her office, her eyes were usually fixed on a large Bloomberg terminal, her ear pressed to the phone. But that morning when Sakhawat entered, he found his wife sitting at a large glass-topped table next to an open drawer containing a tape recorder and two phone jacks.

“What are you doing taping?” Sakhawat asked.

“You know my boss is not good with bonuses, so I want to track the information I give him,” Roomy replied.

This was just one of the many lies she told. Since January 2008, as Roomy had ostensibly been going about her usual business — analyzing companies, gathering snippets of privileged corporate intelligence and deciding which stocks to buy and sell — she was secretly assisting the F.B.I. in a long-running investigation into insider trading at Wall Street hedge funds. Khan was the right woman for the job: Since about 2006, she herself had been trading on inside information. When the F.B.I. caught up with her, she began helping them — at first reluctantly and then with theatrical flair. She taped telephone calls with her bosses, business associates and even a neighbor. Most important of all, she taped calls with her ex-boss, Raj Rajaratnam, whom the government had been eyeing for a decade.

On the morning of Oct. 16, 2009, Wall Street awoke to images of Rajaratnam flanked by F.B.I. agents outside a federal courthouse, looking subdued and sour, with his hands cuffed behind his back. He had been charged by the United States attorney’s office in Manhattan with conspiracy and securities fraud.

Reading newspaper reports about the case, Sakhawat realized that the F.B.I. informant referred to as C.W. (cooperating witness) in the 34-page complaint against Rajaratnam had to be his wife. C.W.’s recorded telephone calls with Rajaratnam suggested that he had access to inside information, enabling the government to obtain court permission to place a wiretap on his cellphone. It was the first time prosecutors had made significant use of wiretaps to investigate white-collar crime, and conversations intercepted from Rajaratnam’s cellphone led the authorities to uncover the biggest insider-trading network in American history. (He is serving an 11-year sentence.)

It took only a few days for friends and associates of C.W.’s many targets to unmask Khan. Within hours of the discovery, the press assailed her as “The Woman Who Ratted on Rajaratnam” and “The Nark in Galleon Bust.” In photographs, she was portrayed as disheveled and sinister. Incriminating episodes from her past were splashed across major newspapers. She and Sakhawat, it was revealed, had been sued by Deutsche Bank for failing to pay off a large promissory note (they later settled). A few years later, their housekeeper accused the Khans of violating labor laws by paying her $250 a week for 80 to 90 hours of work. They also settled a lawsuit with her after a judge said they had doctored evidence.

The gleeful bad-mouthing of Khan went on for years: Her flamboyance and her lying made for delectable reading, especially when it emerged that Khan had not been entirely truthful with the F.B.I. Even after she started cooperating, she manipulated them. Suspecting that Khan had been tipped off to the imminent takeover of Hilton Worldwide, investigators confronted her about shares she had purchased. Khan said she bought them because she thought the jailing of Paris Hilton would be good publicity for the brand. She also took out a cellphone contract in her gardener’s name so she could continue speaking to some of her contacts. She claims she wanted to protect them from the government’s prying; she also wanted to continue making legitimate money playing the markets.

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Khan in Fort Lauderdale, Fla., in December.CreditHolly Andres for The New York Times

Khan’s cooperation did not keep her out of jail. Sentencing her to a year at a women’s prison in Coleman, Fla., near Orlando, Judge Jed S. Rakoff of the federal court in Manhattan admonished her: “You cannot have it both ways. You cannot obstruct justice and then say, ‘Well, because I have done good things since, forget about it.’ ” Before going to jail, Khan spent her mornings walking along the beach, worrying about how she’d survive in prison. But as she learned serving out her term: “Prison is the easiest part. When you get out and there is nothing there — that is the toughest part.”

I met Khan in Fort Lauderdale, Fla., in September, five months after she was released from prison and three months after she was transferred from a halfway house to her own home. I wanted to understand how a highly intelligent woman like Khan — she has a degree in engineering, two in physics and an M.B.A. from the University of California, Berkeley — wound up committing a crime like this. What sorts of calculations had she made to convince herself that the benefits of cheating outweighed the possible costs?

Khan was wary of me. She felt bruised by the way the media had demonized her. All but one of her friends from her California days had abandoned her. Since moving to Florida, she has channeled her energies into raising her only child, her adopted daughter, Priyanka. “I have no outside-world connections,” she told me. Oddly, she was worried that if she agreed to be interviewed for an article, people might think she was paid for her story. (The New York Times does not pay for interviews.) After vetting the idea with her lawyer and her probation officer, she agreed to sit down and tell me about her life.

I had seen so many unattractive photographs of Khan that I was surprised when a spunky woman with large, lively eyes and carefully blow-dried hair bounded up to me in my hotel lobby. Khan, who is about 5-foot-2 and svelte, was dressed in a loosefitting cotton blouse and skinny jeans and carried a horseshoe-shaped, fuchsia Louis Vuitton bag and an iPad on which she tracks a handful of stocks — Apple, Caterpillar and Cummins. She said she has no money to invest. “I do it for the intellectual curiosity. Otherwise my mind would be mush.”

Khan is financially reliant on Sakhawat, who now has a business that manufactures tents in Bangladesh. He has remained loyal to Roomy, but she finds her dependence on him distressing. Khan told me that she hasn’t let go of the sheer pleasure she derives from dropping thousands of dollars on fine things. She vowed she would go straight “to a Louis Vuitton and blow $10,000” if she ever found work. “Why? Because it makes me feel alive. I can’t change my wiring.” During my visit, she showed me a closet filled with some of her former trophies: designer handbags and shoes. She lovingly stroked a black leather Valentino handbag adorned with delicate lace flowers. “Valentino is my favorite brand,” she said, as giddy as a teenage girl.

Khan was born in 1958 into a traditional middle-class family. In January, I met her parents in Delhi, where Khan was raised. Her father, who has a Ph.D. in mathematics, did research on weapons systems for India’s department of defense. Her mother, though trained as a linguist, was a homemaker. In India, many parents whose children have managed to make a life abroad regard the achievement as their own and affect a highhanded snobbery, but hers struck me as down to earth.

Khan’s parents valued education above all else. Her father showered as much attention on his daughter as he did on his son, a level of interest that was unusual in India at the time, and Khan sensed that it was because she showed more promise. But schooling two children strained the family’s finances. When Khan was 9 or 10, her parents pulled her out of Rosary, a private school in Delhi where students were taught English. At the state school Khan subsequently attended, almost all her classes were in Hindi except for science. “I went to college, and I barely knew English,” she told me. She hung around the English speakers at college and kept silent, listening so that she could speak like them.

In 1981, when Khan was 23, she saw an advertisement in a journal about studying abroad at Kent State. She applied to the university’s physics program, and when Kent State offered her a partial scholarship, she leapt at the chance, telling her parents that if they didn’t give her the money for the ticket, she would borrow it. In America, her ambitions grew. Bored with studying in a small, provincial town in Ohio, she applied and was accepted to Columbia University’s master’s program in engineering, where she met Sakhawat, a Muslim from Bangladesh. In 1985, she followed him to California, defying her parents, who are Hindu and disapproved of her choice. “Yes, we lived together in sin for a couple of years,” Khan said, laughing.

Khan got her start in California working for technology firms. In 1995, while she was at Intel, she was given an assignment to do some research on Intel’s rival, Advanced Micro Devices, and she called Raj Rajaratnam, who was then an influential analyst working at a boutique investment bank called Needham & Company. Rajaratnam happened to pick up the phone himself. They chatted amiably for a while about A.M.D., and then their conversation turned to their families. Khan told Rajaratnam that she was Punjabi. Rajaratnam, a Sri Lankan, said that his wife, Asha, was also Punjabi. Over time, Rajaratnam would exploit these sorts of tribal links, cultivating a coterie of loyal acolytes, mostly of South Asian descent, on whom he conferred favor if they gave him occasional tips.

The two struck up a friendship after that, dining together sometimes when Rajaratnam visited California. Though heavyset and not particularly attractive, Rajaratnam was charming — perhaps the brightest man Khan had ever met, she told me. Khan, eager to break into Wall Street, saw Rajaratnam as her ticket out of Intel. She tried to please him, faxing him confidential data on the number of computer chips the company shipped, giving him a glimpse into Intel’s revenue for the quarter. In early 1998, her employer installed a video camera above the fax machine and captured Khan’s stealthy communications with Rajaratnam. She quit before the company had completed their internal investigation into her crime. Her next job was working for Rajaratnam at his new hedge fund, the Galleon Group.

As Khan was starting her career trading technology stocks, the business was about to undergo major changes. In 2000, just before the Internet bubble lost oxygen, the Securities and Exchange Commission moved to introduce Regulation Fair Disclosure, which required publicly traded companies to share crucial information with all investors simultaneously. Before Regulation F.D., companies routinely held one-on-one meetings with hedge-fund managers or investment analysts, at which the companies offered guidance on earnings or provided information about the success of a new product rollout that could have an impact on their bottom line. The culture, especially in Silicon Valley, was chummy, with nascent technology companies vying to attract Wall Street’s attention.

But after Regulation F.D. came into effect, companies became more guarded about divulging information. Some hedge funds, which make money from specific events, like a takeover or an earnings report, had relied on their relationships with companies for insights. The change in Regulation F.D. hurt them, and it came at a moment when the number of hedge funds was growing and competition was becoming fiercer. According to Hedge Fund Research, a group that follows the industry, at the end of 1990, there were 610 hedge funds globally; at the end of 2001, there were 4,454. More regulation, heightened competition and tougher markets meant that hedge-fund managers were always seeking new advantages.

In 1999, after nearly a year of working for Rajaratnam, Khan quit Galleon, wanting to start trading her own money in the Internet-stock boom. A month into trading solo, she was visited by F.B.I. agents, who confronted her with the evidence from her indiscretions at Intel. In 2001, she pleaded guilty to wire fraud, and for the next four years, chastened by her crime, she says, she played by the rules and steered clear of Rajaratnam.

Then one day in 2005, “out of the blue, I got a call as I was driving to my house,” she recalled. “Raj said: ‘Oh, I haven’t heard from you. How are you?’ Then he gave me some skinny on the quarter at Intel.”

Rajaratnam’s call came at a time when Khan needed money; within a few years of the Internet bust in 2001, she had lost $49.6 million, according to her lawyer. The Khans paid cash for the Atherton house, but after the meltdown, they took out a $5 million mortgage on it. To pay it, Khan needed to generate $42,000 a month. But it wasn’t only a sense of financial need that led her back to Rajaratnam; Khan’s thinking about her earlier run-in with the law was starting to change. “It’s almost like you are a drug addict, and you go through rehab, and you are clean,” she says. “And then you are constantly at a party every day where people are doing cocaine. How long can you stay clean?” She was struck by the pervasiveness of insider trading on Wall Street and the extent to which skilled traders bent the rules and took calculated risks by defying the law.

At Intel, she had broken the rules by supplying inside information to someone else; now she was willing to use it to make money for herself. Khan began tapping her vast network, leaning on friends, associates and even a cousin to find new avenues of information. She made inroads into Silicon Valley’s close-knit South Asian community, mixing business and pleasure to her advantage. She invited Sunil Bhalla, an executive at Polycom who was dating one of her close friends, to her home for a holiday dinner in December 2005; a few weeks later, she followed up to ask how his company’s quarter was looking. She played auntie to a young woman from Bangladesh who worked for an investor-relations company. Before long, the woman was feeding her information on Google, one of the firm’s clients, and asking for money in exchange (Khan never paid her). Because Khan had been trading on her own, she often wasn’t invited to one-on-one meetings with company executives like other money managers. “That is how you garner all your nuggets in a legal way,” she said. She would talk to a young investment analyst she knew in New York named Tom Hardin. “Tom was my buddy,” she told me. “We used to barter information all the time.”

From time to time, when Khan picked up a juicy bit from Bhalla or her young investor-relations friend, she would call Rajaratnam and pass it along. In 2005, she landed a job at a hedge fund, Trivium, and she liked that Rajaratnam would share information with her that she could pass on to her new bosses. She also hoped by ingratiating herself with Rajaratnam that he might hire her again.

On Nov. 28, 2007, Khan was working in her home office in Atherton when she heard a knock on the door. There were two people standing outside, a man and a woman. She did not recognize either of them. But “the moment they showed me their badges, my heart sank,” she said.

Khan had been maniacal about covering her tracks, registering cellphones under false names and paying off a source through an intermediary. But she was sloppy once. Two years earlier, she was receiving insider tips on Polycom’s earnings from Bhalla. Distracted by the lawsuit with Deutsche Bank and fighting with her housekeeper, she called Bhalla on his cellphone and his home phone. The feds obtained these phone records and discovered that conversations between Khan and Bhalla followed an incriminating instant message Khan sent Rajaratnam: “do not buy plcm till I het guidance.” When investigators showed Khan that they had the instant-message exchange, she knew she would have to come clean. “With Polycom, I felt I couldn’t really lie, because they had the phone communications.” (When the S.E.C. later sued Bhalla, he denied tipping Khan and reached a settlement.)

After the agents left Khan’s house, she found a lawyer, who advised her to cooperate with the federal investigation. But she figured she could outwit the F.B.I. — she had, after all, gotten off without jail time after her Intel indiscretion, and the government still hadn’t managed to prosecute Rajaratnam.

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Khan’s Punjabi lineage helped her bond with the hedge-fund giant Raj Rajaratnam, whose wife also was Punjabi, and she was soon channeling confidential business information to him.CreditHolly Andres for The New York Times

During her regular trips to New York to meet with prosecutors, she avoided contact with Rajaratnam. “I knew he was the bull’s-eye,” she says. “In my mind, their target was Raj, and I was not going to get in their way.” But she went out of her way to warn others. Once, when Khan was going to meet with prosecutors in New York, she sought out her buddy Tom Hardin. “Listen, the S.E.C. is asking about the Hilton trade,” she told him. “Have a story.” Khan was so intent on protecting Hardin that at one point, she says, an F.B.I. agent screamed at her: “What does Tom Hardin mean to you?” (Hardin later pleaded guilty to insider trading.)

Khan insists that she was driven by a desire to shield people: “They were all young kids. Some of them were my relatives. Because of the kind of relationship I had with them and how young they were, I was aghast that I was going to destroy their lives.” She continued: “I didn’t lie for myself. I really lied for other people, which is very stupid. Everybody knew what they were doing. When someone working at an institution like Moody’s comes and asks you for money, they know that is not what they should be doing.”

It’s hard to know what Khan’s real motives were, but I tended to believe her expressions of sympathy for her young, ambitious colleagues, her guilt at exposing their wrongdoing in a climate of widespread rule-breaking. She spoke about the extreme temptations of making sure bets on stock trades. When we met, she’d been closely watching Caterpillar and Cummins stocks. If she were still in the business of playing the markets, she said, she would have tried to short Caterpillar and go long, or take a bullish bet, on Cummins. If she’d put in the trade a few days earlier, she would have made $4 or $5 a share on the Caterpillar short position, “which is not bad,” she said. So why, I asked her, had she resorted to insider trading when there was ample money to be made through good old-fashioned stock analysis?

“Do you think I would bet $1 million on my analysis?” she said, with a look of mock disdain. “But if someone told me Caterpillar is going to miss its quarter, I would bet $1 million. Insider trading introduces certainty.” That certainty felt like magic: A little money, with the press of a button, could become a heap of money. It’s a temptation that has taken Khan much of her life to learn to resist.

At first Khan was reluctant to invite me into her home, saying that Sakhawat would not approve. One afternoon, when he left to pick up their daughter from school, Khan had me over for a cup of tea. Perhaps it occurred to her that it might look inhospitable not to. She apologized before inviting me in: “I used to have a full-time maid. When I came to Florida, I didn’t know how to run laundry. I had never mopped the floor. I think about it now. I cook, I clean, I mop. I feel this is part of my absolution.”

The 2,500-square-foot mustard yellow house sits close to a busy intersection and is the same size as the maid’s quarters in Khan’s former residence in Atherton. Paint was peeling from the ceiling in the kitchen. In the living room, unironed shirts were slung over chairs, and papers were strewn across a table. A broken toilet gurgled upstairs.

The only vestiges of her former life were a couple of imposing and rather austere works of modern art and expensive pieces of furniture that crowded the rooms. She pointed to a stainless-steel credenza that barely fit across one wall in the dining area. It cost $20,000. I asked about the long brown couch that swallowed up most of the living room. She thought she paid between $10,000 and $15,000 for it.

When I visited, Khan was a week away from celebrating her 56th birthday. She seemed addled, struggling to fashion a new identity for herself. Khan has worked since she was 27. When she was trading stocks on her own, she started her days at 6 in the morning and worked till 8 at night. “Even when we had the big money, I worked,” she told me. What bothered her the most, she said, is that “the thing that has made me has been taken away from me.” Her probation officer suggested she find work as a cashier, but Khan believes she is capable of more.

In December, Khan took the G.R.E.s and scored fairly well. She applied to the Ph.D. program in finance at the Wharton School, among others. She wants to focus on insider trading and white-collar fraud. “I will not be a typical Wharton Ph.D. program student,” she wrote in her Wharton application essay. “However my life experiences, although extreme, have prepared me uniquely to do research on insider trading/ethics.”

In February, she received a rejection, but she’s waiting to hear from several other schools. If she doesn’t get in anywhere, she would like to write a book, perhaps go on the lecture circuit, sharing with aspiring traders and business people the cautionary tale of her easy slide into committing crimes. Addressing an issue many South Asians have raised with me about the Galleon prosecutions, Khan said flatly: “I don’t think there is a racial angle. I don’t think it had anything to do with us being Indians. I got in trouble because of my association with Raj, and Raj got in trouble because of his braggadocio.” When I asked her what she thought about the fact that the leaders of the major banks who bear the most responsibility for the financial crisis in 2008 haven’t been prosecuted for their crimes, she answered with her usual pragmatism: The government likes to bring cases it can win.

On my last day in Fort Lauderdale, Khan and I took a walk among the tall palm trees that line the beach near her house. Khan was in a reflective mood. She told me that her sister-in-law from Bangladesh said to her: “Bhabi,” a term used to address an older brother’s wife, “don’t think of what you’ve lost. Think of what you have, and you’ll be happy.” For the first time, she is trying to embrace that advice. “The worst-case scenario is I will be a housewife for the rest of my life,” she told me. Then she added: “I am very fortunate. I am not homeless. I still have a life.”

Anita Raghavan is the author of “The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund.”

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